The South African Reserve Bank published a Working Paper examining how fintech startup formation relates to the risk and performance of incumbent South African financial institutions. The paper finds that fintech formations are associated with lower bankruptcy and credit risk and lower stock return volatility, alongside improved performance measures, but that the relationship is nonlinear and can shift from risk-reducing collaboration to risk-increasing competition as fintech entry expands. Using data from 1998–2020, the authors identify 147 fintech firms and analyse a sample of 70 banks and non-bank financial institutions using Z-scores, non-performing loans and stock-return volatility, supported by robustness tests including country-level indicators. Risk reduction is mainly linked to improved profitability and higher equity-to-assets ratios, partly offset by increased profit variability. The results are heterogeneous by bank size, with smaller banks experiencing more pronounced risk reduction while large banks show the opposite effect, and the paper cautions that while collaboration may be beneficial, regulators should remain alert to potential systemic risk arising from competition and increasing interconnections.
South African Reserve Bank 2025-08-04
South African Reserve Bank working paper links fintech formation to lower default risk and stronger performance with U-shaped effects for banks
The South African Reserve Bank's Working Paper examines fintech startup impacts on South African financial institutions' risk and performance. It finds fintech entry generally reduces bankruptcy and credit risk and enhances performance, though effects vary by bank size and can shift from collaboration to competition. The study highlights the need for regulatory vigilance regarding potential systemic risks from increased competition and interconnections.